The portfolio is currently 87% invested into Marathon Asset Management's Global Equity Fund, with the remainder in cash. The fund's US dollar performance for the quarter was a touch over 1% better than the MSCI World Index. Over the past twelve months, this fund returned +21% in US dollars, which is 3% ahead of the benchmark (MSCI) return of 18%.
International equity markets experienced a relatively dull quarter as investors tried to make sense of the impact of US elections, currency volatility, rampant oil prices and the knowledge that easier monetary conditions were in the past. The FTSE World Index was down by 1% in USD-terms, while Emerging Markets again set the pace, recording growth of 7% in the past quarter. The Pacific region, excluding Japan, jumped by 6% as the China effect continued to weave its magic. The worst performer of the majors was Japan, falling by 8%.
The extreme rand volatility experienced over the past few months continue. During August the unexpected interest rate cut led to rand weakness in the region of 5-7% against the major trading partners, and in September it was the surprise announcement of Barclays Plc's interest in Absa. This led to speculation of a potential large inflow of capital to fund the acquisition, and thus the rand strengthened 2% against the UK sterling and 2.5% against the US dollar.
Marathon Asset Management comments as follows:
"The broad portfolio views remain; a bias towards small- and medium-sized issues (with the exception of Japan where the portfolio has been moving up the size spectrum now that many large capitalization issues are priced at a discount to their smaller brethren), an underweight to North American, and a corresponding overweight to both Asia and Japan and to a much larger extent, Asia ex Japan"

The underlying fund, managed by Marathon Asset Management Ltd in London, had a reasonably muted month. The fund's US dollar performance was in line with the MSCI World Index. Over the past twelve months, this fund returned +20% in US dollars, which is 4% ahead of the benchmark (MSCI) return of 16%.
The extreme rand volatility experienced over the past few months continued, albeit that the direction changed. The unexpected interest rate cut was the major catalyst this time around. The rand weakened against the euro by 7%, the US dollar by nearly 6% and the British pound by nearly 5%. Investors in the fund have thus benefited from rand weakness, while world markets have remained flat (as measured by the MSCI World Index).

Marathon Asset Management comments as follows:
"Activity in Japan continues to emphasize larger capitalization cash generative businesses, particularly those with dominant positions in their respective industries. A comparison of cash-adjusted price-to-free cash flow multiples with their international peers suggests just how cheap high quality Japanese companies are; Takeda 12x vs. Pfizer (UK) 25x, Japan Tobacco 4x vs. Philip Morris (USA) 10x and Ito Yokado 11x vs. Wal-Mart (USA) 40x!"
"The broad portfolio views remain; a bias towards small- and medium-sized issues (with the exception of Japan), an underweight to the USA and Continental Europe and a corresponding overweight to Asia."

Nedcor Retail Investments proposes on the 1 Nov 04, to amalgamate the Nedbank Global Index Feeder Fund with the Nedbank Global Equity Feeder Fund, and will be managed according to the investment policy of the Nedbank Global Equity Feeder Fund, which invests into a single portfolio managed by Marathon Asset Management. Marathon has a 17-year track record and is renowned in the investment industry for its independence, high quality proprietary research, intellectual capital and integrity. Earlier this year, Global Investor Magazine announced their "Awards for Investment Excellence" and Marathon was the winner in both the premier Global and European Equities categories.

Markets were broadly unchanged over the quarter as confidence, boosted by a buoyant corporate profit environment and growing M&A activity, was tempered by further rises in the oil price and a slight pick up in global interest rates.
The fund marginally under-performed its benchmark over the quarter due to stock selection, particularly in North America and the Pacific basin ex-Japan (most notably Hong Kong), overweights to Hong Kong and Malaysia, and a general underweight to the US dollar, which rallied. This stock selection shortfall underlines the extent to which the fund continues to be invested differently to the index, and has a disproportionate number of investments with profit recovery potential.
The overall portfolio position barely changed as portfolio turnover was just 4.8% for the quarter, in line with "normal" levels and implying an investment-holding period of 5.2 years. The mid-capitalisation bias remains, as does the underweight to North America and to a lesser extent continental Europe, at the expense of the overweight to the smaller Asian markets. The fund remains significantly underweight in financials, energy and healthcare. However, within the portfolio the price to book value ratio gap with the index has narrowed. Intriguingly, however, the weighted average price/earnings ratio of the portfolio is 31.5, versus 19.8 for the index, implying that the portfolio is significantly "under-earning" per unit of book value. While the portfolio may or may not be undervalued, profit growth should exceed the index going forward, unless derailed by a major external event.
Although equity markets finished the quarter broadly unchanged, three factors caused considerable investor nervousness. Firstly, evidence of economic recovery reached the point at which investors regard higher short-term rates in the major economies as inevitable. Secondly, investors were surprised by the continuing scarcity and high price of oil, and thirdly, a series of events in China raised the spectre of a slowdown in that market/economy that might be neither modest nor short-lived. This was not an environment in which recovery or cyclical stocks could be expected to do well, and they didn't. At times of high uncertainty investors prefer predictable cash flows, and businesses with supposedly defensive qualities did better than others this quarter.
Overall, equity markets look generally unattractive as constituent company share prices are characterised by high multiples of generally good profitability. This is not a level from which good absolute gains should be expected. However, the fund manager's are confident that they can identify investments that offer index-beating potential.

In the fourth quarter, the underlying fund managed by Marathon capped a fantastic 2003, outperforming its benchmark, the MSCI World Index, by 12.16% in US dollars. Marathon MSCI

Given this performance, understandably most active bets produced positive results. These included: stock selection in the United States, the overweight exposure to cyclicals and underweight to defensives, purchasing of recovery situations or "busted growth stocks", additions to real estate in Hong Kong, currency selection, and as a general theme, the preference for mid caps over mega and large caps. A minor detractor to performance came from currency-translated performances in Malaysia, Singapore and the Philippines.

Interesting examples of stock specific purchases included Nippon Oil, Tokyo Gas, Japan Tobacco, Altria (previously known as Philip Morris - where litigation problems are receding and are well discounted), Liberty Media, Sun Microsystems and Hollinger. Sales included Mattel (manufacturers of Barbie Doll), Pechiney, Wolters Kluwer (a Dutch publisher), Hasbro and Enodis (a European catering company).

Turnover was fairly low - a hallmark of Marathon's long-term investment stance. The fund remains underweight large caps. Geographically the large overweight to Asia ex-Japan remains at the expense of North America.

In terms of managing the fund from a South African perspective, the fund manager's have completed the sale of the small portion of the fund that was managed by Dresdner, and invested the proceeds with Marathon. The fund manager's anxiously await further developments on exchange controls from the Reserve Bank - the absence of which has somewhat hindered the preferred asset allocation.